By Andrew Body & Simon Jensen*
Nicola Willis has been reported in a recent debate with the Grant Robertson saying she wants to widen the scope of the Commerce Commission's banking market study to include examining business banking settings, which would include looking into the effect of the Reserve Bank's prudential settings and how they might impact the willingness of commercial banks to lend to businesses.
The Commerce Commission’s banking study does not extend to business banking but should. Based on submissions that have been made to date, the RBNZ's prudential settings that impact business banking should be very firmly in the study's sights. Certainly, this seems at the heart of a number of the concerns expressed by the New Zealand owned challenger banks – Co-operative Bank, Kiwibank, SBS Bank, and TSB Bank.
However, if Nicola Willis is the next Minister of Finance, there are far quicker and more effective ways for her to address concerns about the RBNZ’s prudential settings than relying on the Commerce Commission report in August next year.
We made some suggestions for a fix in our earlier article “Bank prudential regulation is hurting productivity, it’s time to fix it”, published in Interest.co.nz on 3 August.
Here we add to and expand on some of those suggestions.
The incoming Minister of Finance should:
1. Immediately issue a new Financial Policy Remit to the RBNZ under s.203 of the Reserve Bank of New Zealand Act. That Financial Policy Remit should focus on:
implementing prudential settings that enhance productivity and economic growth in New Zealand – rather than the current weak requirement of simply requiring the RBNZ to have regard to those things;
facilitating competition and innovation in the financial sector through a proportional approach to prudential regulation; and
requiring the RBNZ to review its risk framework and its approach of wanting to adopt a more conservative approach to prudential management than its international peers.
2. Appoint a prudential policy committee consisting of experienced and independent, non-executive individuals with the skills to be responsible for all of the RBNZ’s prudential management (i.e., legal, financial and banking skills) and give that prudential policy committee a statutory mandate (by amending the Reserve Bank of New Zealand Act 2021 to adopt the monetary policy committee formula in sections 101 to 105 and 117 to 132 of the Act). The charter of the prudential policy committee should include:
ensuring that RBNZ’s prudential policies are completely consistent with the financial policy remit (and not the current weak approach of having regard to and ensuring they are not "inconsistent with" the Financial Policy Remit);
reviewing the current RBNZ work programme with the aim of eliminating or reducing many of its projects to improve its focus on its functions – and using international models as a starting point;
overseeing compliance by RBNZ to the rule of law (given its relatively unique position as a regulator that also sets the rules). This should include both:
ensuring that prudential rules are consistent with not just the letter of its statutory delegations but the purposes expressed by Parliament in relation to those delegations;
overseeing directions given by the RBNZ to ensure that they are consistent with its legal powers (so that situations like CBL, where the Court found the directions were not lawfully given by the RBNZ does not occur again).
liaising with the International Monetary Fund, Basel Committee and probably Australian Prudential Regulation Authority to explain the approach being taken and ensuring it is consistent with international practice for small economies like New Zealand.
3. Require the Prudential Policy Committee to review a specific set of prudential standards which may have a negative impact on productivity and reduce the length of time it takes to develop policies.
Such review should include:
the appropriateness of existing risk weightings used for capital adequacy purposes – particularly those relating to business lending and alternative housing tenures;
eliminating as far as possible the difference between the risk weightings applying to the large banks (internal rating based) as opposed to the standardised ratings that other banks must use;
the assumptions which have been used to determine the quantum of capital required by New Zealand banks in light of international norms (and in particular whether New Zealand should adopt a one in 100-year failure assumption as opposed to the one in 200-year failure assumption currently used);
ensuring that the levy principles used to fund depositor compensation take into consideration the contagion impacts of large bank failure and encourage competition and financial inclusion as a key component of the levy framework;
changing the decision not to allow contingent convertible debt as Alternative Tier One capital (when all other peer regulators allow it and it expands the capital options available to New Zealand banks);
removing the open bank resolution policy - it didn't work in Cyprus a decade ago and has now been superseded internationally by much more credible mechanisms like bail-in debt;
opening access to RBNZ financial support to all entities that it regulates and in particular ensuring that all prudentially supervised entities have access to exchange settlement accounts and Reserve Bank funding (including as a lender of last resort) on a fair and equitable basis - currently those facilities are typically only available to the larger banks or at least most easily exploited by the large banks; and
ensuring the RBNZ branch policy is more consistent with international practice and in particular, potentially enables Indo-Asia Pacific banks to enter the New Zealand market.
While these are things that a new Minister of Finance can do, there are also elements of current National and ACT policy which should be enacted swiftly to remove deadweight compliance costs in financial regulation and which would help productivity. These are steps the Minister of Finance would likely have to work on with the Minister of Commerce and include:
requiring an independently chaired Council of Financial Regulators to institute a single reporting model for regulated entities (so that multiple reports containing similar data are not provided to multiple regulators). Data which is not relevant should be removed from reporting. Regulators should be required to identify must have and nice to have data and why as part of this exercise;
the Council of Financial Regulators coordinating and limiting consultations to no more than one a month across the entire financial sector as well as capping the size of consultations and requiring agencies to be transparent about the number of changes proposed as a result of the consultations;
substantially simplifying the CCCFA (noting the current government has started this process but opted for an unhelpful middle ground option when it should have opted for the full review). This should involve removing matters (including consequences) related to affordability and disclosure where New Zealand's approach is in some cases a significant outlier from international practice.
Resources can if need be, be redirected to better enforcement of existing hardship rules;
removing the licensing requirement created in the Conduct of Financial Institutions legislation applying to banks and non-bank deposit takers; and
examining what further changes can be made to New Zealand's anti-money laundering rule to simplify them without compromising international obligations.
In essence, substantial regulatory failure and red tape in credit allocation is hurting New Zealand consumers (and at best protecting a only very small percentage of them) and our powerhouses of innovation and employment, small and medium sized businesses. This regulatory failure is a failure of inaction by Parliament and the executive arm of government.
The fragile state of the New Zealand economy and long-term decline in our productivity is very serious.
Price instability and poor productivity have many vectors to the misery of New Zealanders that is all around us.
Fixing failing education, infrastructure, fiscal responsibility and other regulation to improve productivity are worthy projects, but they are long term and complex projects with uncertain outcomes. However efficient credit allocation to reduce the cost of capital for business and improve our productivity is indeed a silver bullet.
A slightly more ambitious new government would free up foreign direct investment and re-orient the tax system towards innovation and productivity.
But in any event, a new government can easily address the problems with small and medium sized businesses’ access to credit, to improve productivity. The detailed steps set out above are a practical way for a new government to make a substantial and immediate contribution to our economy.
*Andrew Body is a company director, active investor and investment banker. He has an MCom in economics and an LLB from the University of Auckland.
**Simon Jensen is a legal consultant with a BCom in accounting and LLB from the University of Auckland.